Prominent UK politicians are questioning crowdfunding after a string of high-profile failures

Andrew Tyrie, the chair of the influential Treasury Select Committee in parliament, wrote to Britain's financial watchdogs to ask them how they regulate crowdfunding, after a string of high-profile failures for "crowd" backed businesses.

Conservative MP Tyrie wrote to Tracey McDermott, the acting CEO of the Financial Conduct Authority (FCA), and Andrew Bailey, the Bank of England's Deputy Governor for Prudential Regulation, asking them to clarify their position on crowdfunding.

Crowdfunding is where a "crowd" of investors come together online to invest in a business. Typically they are retail investors, not institutional investors. Investors can take a stake in early-stage, high-risk companies from as little as £10.

Tyrie's letter to McDermott asks for information on "the FCA's approach to the risks and opportunities afford[ed] in the growth of this and related sectors."

Tyrie asks specific questions on the required due diligence for company pitches and consumer understanding of the risks involved, set out below:

The letters follows a string of high-profile failures in the crowdfunding sector and allegations of investors being misled.

Rebus, a claims management company, raised £816,790 ($1.17 million) on Crowdcube last year but went into administration in February. The Times claimed investors were not made aware that restructuring experts had been called in prior to the raise. The paper also highlighted that fact that the pitch featured an advisor banned by the City regulator in 2012 for illegally promoting a failed investment scheme. Rebus and Crowdcube have both refuted these claims to BI.

More recently Cambridge-based Solar Cloth Company collapsed into insolvency in May after raising £967,130 on Crowdcube in January last year. The Times last week also claimed custom shoe designer Upper Street did not tell investors it was in serious financial difficulty when it attempted a second crowdfunding round on platform Seedrs last year. The pitch was abandoned after the company fell into insolvency.

The incidents have raised questions about the disclosures made to investors by companies looking to raise money and investors awareness of the potential risks.

Luke Lang, cofounder and CMO of Britain's biggest crowdfunding platform Crowdcube, defended his platform's due diligence process in an interview with BI last month, saying:

Any statements on a pitch, we'll check. Any statements on the size of a market, we'll need to see third party validation. If they've got any significant material contract in place or IP we'll look into it and check it. The facts that are presented on the pitch are fair, clear, and not misleading and an investor can read it and make their own decision.

What we don't and what we'd never confess to do is decide whether or not it's a good business in a great market opportunity. That's for the investors to decide.

Lang told BI that Crowdcube has beefed up its due diligence process since the collapse of Rebus. He highlighted the fact that the vast majority of startup businesses fail and said investors are made well aware of the risk they are taking when investing.

Jeff Lynn, CEO of crowdfunding platform Seedrs, told BI in an emailed statement this morning:

We welcome Mr Tyrie's letter to the FCA. We believe that the issues he raises are important ones, and they are very much the issues that Seedrs has worked hard since inception to ensure that it successfully addresses.

Seedrs was the first regulated equity crowdfunding platform in the world. We are authorised and regulated by the FCA, and we are very closely supervised by them in everything we do. We ensure that thorough due diligence is done on every company that receives investment through Seedrs.

Moreover, we ensure that all investors who use Seedrs understand the risks of investing in early-stage businesses as an asset class, including by requiring them to take and pass a quiz demonstrating their knowledge of the space (which is a significantly more protective measure than used by investment firms in most other asset classes). To the extent that

To the extent that Mr Tyrie, or any of his colleagues, would like to understand better how we work and how we address his concerns, we would be very happy to meet with them at any time.

The FCA currently regulates investment based crowdfunding, ensuring tests are carried out to ensure people can afford to invest, pitches are vetted, and investors are warned about the illiquidity of these investments.

The regulator says it sees crowdfunding as "a high-risk investment activity" and warns investors on its website that "it is very likely that you will lose all your money."